chapter 9 perfect competition

when does a firm make a profit loss or break-even?

• If P > ATC, the firm is making a profit • If P = ATC, the firm is breaking even • If P < ATC, the firm is making a loss

what is marginal revenue in a perfect competion

1) : is the change in total revenue from selling one more unit of a product.

how are perfectly competive firms efficient?

1) Efficiency in economics refers to two separate but related concepts: Productive efficiency is a situation in which a good or service is produced at the lowest possible cost. Allocative efficiency is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

do firms control their price in a perfect competition?

1) perfectly competitive firms doo not have control over their prices they charge for their output because many other competitions are selling the product and are therefore price takers. Price is always constant represents a horizontal demand line. because of this price marginal revenue and average revenue are all equal to each other

what are economic profits?

1) the level of profit that occurs when total revenue is greater than total cost.

examples of an upward sloping supply curve

1. If some factor of production cant be replicated, additional firms may have higher costs ex) grapes only grow in certain climates , new entrants may have higher costs then exiting firms This is an increasing cost- industry that would have an upward sloping long run supply curve

what are the rules for profit maximiazation

1. level of output is where the diff between total revenue and total cost is the greatest 2. the level output is also where MR=Mc(1 and 2 are true for every firm) 3. level of output is also where p=mc( only true for perfectly competitive)

what is constant cost?

Constant cost industry: an industry in which the firm's cost structures do not vary with changes in production

what does a perfect competitive firms demand look like?

Face a horizontal demand curveas firms are too small to effect the market price.

what does it mean if mc=mr

In this case, we would want to make the smallest loss possible. • Note that sometimes a loss may be unavoidable, if we have high fixed costs. It turns out that MC=MR is still the correct rule to use; it will guide us to the loss-minimizing level of output.

examples of an downward sloping supply curve

On the other hand, sometimes additional firms might generate benefits for other firms in the market, leading additional firms to have lower costs of production. Example: Smartwatches require specialized processors. As more firms produce cell phones, economies of scale in processor-production reduce cell phone costs. Such a decreasing-cost industry would have a downward-sloping long-run supply curve

what are the 4 market structures in decreaing order in competivness?

Perfectly competitive: very large number of firms, have standardized products, no control over prices, very easy entry, examples: agriculture. Relatively rare Monopolistically competitive markets: many firms, have differentiated products, have some control over price but very little, relatively easy entry, non-price competition there is a considerable emphasis on advertising and brandnames, ex) retail trade, dresses, shoes Oligopolies: very few firms, standardized+ differentiated products, limited by mutual inter-dependence considerable with collusion, significant obstacles, non-price competition Is typically a great deal, particularly with product differentiation, ex) auto and steel Monopolies: one firm, unique products, considerable control over price, blocked entry, nonprice competition mostly public relation advertising, ex) local utilities'

how much to produce in a perfect competion?

Produce up to the level where marginal revenue or market price is equal to marginal cost. 1) Firms entering + leaving the market a. If firms are making an economic profit, additional firms enter the profit, driving down price to the breakeven level b. If firms are making and economic loss, existing firms exit the market, driving the price up to the break even level

how to decide wether to produce or shut down in short run?

So if P < AVC, the firm should produce 0 units of output. If P AVC, then the MC = MR rule guides production: produce the quantity where MC = MR. For a perfectly competitive firm, this means where MC = P.

the effect of economic losses

Some farmers will exit market. Resulting in dec in supply causes prices to rise. Firms continue to leave until price returns to the break-even price

what are sunk costs?

Sunk costs are costs that have already been paid and cannot be recovered; even if they have nor literally been paid yet, the firm is still obligated to pay them.

the effect of entry on economic profit?

The increased supply causes the market equilibrium price to fall. It falls until there is no incentive for further firms to enter the market; that is, when individual farmers make no economic profit. For this to be true, the price must be equal to ATC; but since P=MC, that means all three must be equal.

what are the long run scenarios in a perfect competition?

a. Long run equilibrium takes place at a price that offers no incentives for firms to enter or exit the market. This occurs where price is equal to the min average total cost of production. b. If firms are making an economic profit, additional firms enter the profit, driving down price to the breakeven level c. If firms are making and economic loss, existing firms exit the market, driving the price up to the break even level d. Since the long-run average cost curve shows the lowest cost where a firm is able to produce a given quanity of output in the long run, we expect price to be driven down to the min point on the typical firms long-run average cost curve. Long run competitive equilibrium: the situation in which the entry + exit of firms has resulted in the typical firm breaking even Long run supply curve- a curve that shows the relationship in the long-run between the market price an the quanity supplied

what are the characteristic of a perfect competition?

a. The number of buyers + sellers is large b. The product is standardized c. The producers are price takers d. Easy entry + exit

examples of products from perfect competition

cotton and cucumbers because they are price takers and cannot manipulate the price. They are standardized. Homogenous products produced by many firms nationally and internationally. There are no significant barriers from preventing them to grow this product instead of another one

what are price takers?

price-takers: they are unable to affect the market price. This is because they are tiny relative to the market, and sell exactly the same product as everyone else.